Plaintiffs may think that they've hit a home run when they can enforce their big judgment against the defendant's liability insurer that refused to settle the claim within policy limits before the judgment was entered.
Recent cases, however, serve as a reminder that recovering an excess judgment from a nonsettling insurer is fraught with obstacles. Failing to touch all the bases can take the home run off the books, no matter how hard the ball is hit.
A recent case in the Texas Supreme Court—Seger v. Yorkshire Ins. Co., 2016 Tex. LEXIS 503 (June 17, 2016)—presented a typical scenario: a worker was killed in a 1992 drilling rig accident, and his parents (the Segers) sued the drilling company, which tendered its defense to its commercial general liability insurer. The insurer denied coverage and refused to defend.
Just before trial in 2001, the insurer refused to settle the case for $250,000, well within the policy limit. The plaintiffs obtained a judgment against the drilling company for $15 million, and the company assigned its rights against the insurer to the Segers, who then sued the insurer for negligent failure to settle (often called a Stowers action, after a 1929 Texas case). The jury found for the Segers, and the trial court entered a $37 million judgment against the insurer.
After the judgment was reversed and remanded, the Segers again prevailed and were awarded over $71 million in damages and accrued interest. Twenty-four years after the accident, and 15 years after the first trial, the Texas Supreme Court reversed the Stowers judgment, holding that the policy did not cover the underlying claim.
General liability policies commonly give the insurer the right and duty to defend the insured against claims that are potentially covered by the policy. Accepting responsibility for the defense generally gives the insurer control of the defense, including decisions about settlement. Because that control creates a potential conflict of interest in some circumstances, the law imposes on the insurer a duty to consider the insured's interest when faced with the risk of a judgment exceeding policy limits.
In most states, if not all, an insurer that has a duty to defend and wrongfully fails or refuses to settle a claim against its insured within policy limits risks being held liable for a subsequent judgment against the insured that exceeds the policy limits. A successful Stowers action thus allows the plaintiff to collect a judgment that might otherwise not be collectible from the insured defendant. The key to this result is that the failure to settle must be "wrongful" (i.e., negligent or in bad faith).
Although state laws vary on some aspects of a Stowers action (and give it different names), the basic elements are fairly consistent. In Texas, for example, to hold an insurer liable for an excess judgment, the policyholder (or its assignee) must prove the following.
The claim is within the scope of coverage;
A demand was made that was within policy limits; and
The demand was such that an ordinary, prudent insurer would have accepted it, considering the likelihood and degree of the insured's potential exposure to an excess judgment.
Seger, 2016 Tex. LEXIS 503 at *12 (citing American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994)); see Graciano v. Mercury General Corp., 179 Cal. Rptr. 717 (Cal. App. 2014) (stating elements of bad-faith failure to settle under California law). After two appeals, the Seger claim ultimately faltered on the first element, because the court found the injured worker was a "leased-in worker," not an independent contractor.
While all states require the claim to be "within the scope of coverage," not all states require a demand within policy limits to trigger the insurer's settlement duty. In Oklahoma, for example, "a primary insurer owes its insured a duty to initiate settlement negotiations with a third-party claimant if the insured's liability to the claimant is clear and the insured likely will be held liable for more than its insurance will cover." SRM, Inc. v. Great Am. Ins. Co., 798 F.3d 1322 (10th Cir. 2015); see Badillo v. Mid Century Ins. Co., 121 P.3d 1080 (Okla. 2005).
This duty, however, does not extend to excess insurers, who generally have no duty to defend or settle until the primary insurer has exhausted its policy limits by paying claims. SRM, 798 F.3d at 1329; see also AFTCO Enters. v. Acceptance Indem. Ins. Co., 321S.W.3d 65, 71 (Tex. App.–Houston [1st Dist.] 2010, pet. denied).
It is, therefore, very difficult to make an effective Stowers demand on two insurers by offering to settle claims for an amount within their combined policy limits, but not within the limits of any single policy. In states that impose a duty to initiate negotiations, liability for an excess judgment requires evidence that efforts to settle within primary limits would probably have resulted in a settlement within limits.
Stowers claims often turn on the third element—a reasonably prudent insurer would have accepted the demand within policy limits. As a threshold matter, insurers generally may decline to accept a demand that does not entail a complete and unconditional release of the third party's claims against the insured. See, e.g., Graciano, 179 Cal. Rptr. at 726; Shaheen v. Progressive Cas. Ins. Co., 114 F. Supp. 3d 444 (W.D. Ky. 2015) (citing Kentucky and Massachusetts cases). This element requires evidence of the information available to the insurer at the time decisions were made, based on a thorough investigation and communications with the insured concerning the "likelihood and degree of the insured's potential exposure." It is not satisfied merely by hindsight in the face of an excess judgment.
Multiple claimants or multiple insureds can complicate the assessment of the insurer's duties and make an effective Stowers demand more elusive. An insurer is generally not obligated to accept a settlement demand within policy limits by one claimant if claims against the insured by other parties would remain unsettled. By the same token, an insurer is not required to accept an offer to settle claims against one insured while leaving other insureds unprotected. See Graciano, 179 Cal. Rptr. at 726; Patterson v. Home State Cnty. Mut. Ins. Co., 2014 Tex. App. LEXIS 4460, *24–27 (Tex. App.–Houston [1st Dist.] Apr. 24, 2014, pet. denied). The circumstances under which an insurer may favor one insured over another insured, or one claimant over another—issues on which the states differ—are subjects for another day.
Another condition that can cause a plaintiff's home run to be reversed is an excess judgment that is not the product of a "fully adversarial trial." Although the Texas Supreme Court did not reach this issue in Seger, this is the ground on which the intermediate appellate court reversed the judgment. 2016 Tex. LEXIS 503 at *11; Yorkshire Ins. Co. v. Seger, 407 S.W.3d. 435 (Tex. App.–Amarillo 2013) (citing State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 713 (Tex. 1996)). As the court explained, "Before the underlying judgment was obtained, [the insured] was judgment-proof and each of the individual principals … had been nonsuited." Further, the insured "was not represented by counsel, did not announce ready at the start of trial, made no opening or closing statements, offered no evidence, and did not cross-examine any of the Segers' witnesses." 407 S.W.3d. at 441–42.
Although the post-judgment assignment of the insured's Stowers claim to the plaintiff was valid, the court held the judgment was not admissible to prove recoverable damages. This is akin to baseball's "defensive indifference" rule … but with more significant consequences.
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